Inflation and your investments

In 1996, a litre of unleaded petrol cost you R1.74. Around the same time, a standard movie ticket – which now sells for over R50 – would have cost you less than R15. Getting down to basics, a loaf of sliced white bread costs you twice as much today as it would have a decade ago….

It’s called inflation: A general increase in prices over a sustained period of time. Most of us will be familiar with the concept – and with the resulting pressure on our pockets. But have you considered the impact inflation has on your investment strategy?

With consumer inflation (CPI) having recently climbed first to 6.3% and then to 6.4% (hitting a four-year high and breaching South Africa’s target range of 3% - 6%), now may be just the time to do so.

The real return on your investments

As the prices of goods and services rise, the purchasing power of your money declines. Simply put, R100 stashed under your mattress will buy you less in future than it can today. Or, to put current figures in context, you’ll now need to spend an average of 6.4% more than you had to a year ago to maintain your basic lifestyle.

To preserve your current purchasing power, you’ll need to ensure that your savings are invested to grow in line with inflation. To increase your purchasing power in future, you’ll need to target investment growth that exceeds inflation.

Asset allocation

How do you invest to outpace inflation? Although subject to short-term volatility, equity is the asset class most likely to deliver inflation-beating returns over the long term. Investors who have an investment horizon of at least five years could therefore consider a significant exposure to equities in their investment portfolios.

To simplify matters, you could consider investing in an inflation-linked unit trust. These unit trusts have inflation-related targets set as their performance benchmarks. You are therefore easily able to select a unit trust that seeks to deliver on your return objectives.

For example, investors with a higher risk appetite and longer investment horizons could consider a unit trust with a performance objective of CPI + 4% or more. Investors with lower risk appetites and shorter to medium-length investment horizons could consider targeting growth that equals CPI, or outpaces inflation by 2% or so. In all instances, you’ll benefit from the expertise of professional asset managers who target inflation-beating returns on your behalf.

Fees

Finally, you should keep in mind that investment fees will ultimately lower your investment returns – and the percentage by which you outperform inflation. It is therefore important to ensure that you are offered a competitive fee structure.

By making appropriate investment decisions and ensuring that your investment fees remain reasonable, you can make headway in preserving your purchasing power even when CPI inflation is making the headlines.